EIS loss relief & personal experience of VCT, EIS and development loans

[Walkeia]

Hi everyone,

Back in 16/17/18 I trialled some higher risk investments. Over this period I invested in 3 EIS (one was SEIS); 3 VCTs and 3 development finance loans to see if I wanted to add any of these investments to my portfolio longer term. My question relates to EIS loss relief - one SEIS and one EIS investment are effectively on life support and I am confident they will be worthless. Do I have to wait for the company to fold to claim loss relief? - Is it possible to write them off or gift them to charity for naught etc. and claim the loss relief this year?

Many thanks

W

In return - here's my personal experience, thoughts and % returns from the investment portfolio. First some top level info - the VCT, EIS, loan portfolio was weighted 66.6%; 22.2% 11.1% before-tax relief due to my perception of the risks of each sector and I accept that a sample size of 3 in each investment class may not be enough for me to draw meaningful conclusions but it is all I have so here it is:

Development loans; -20% on capital total return over 5 years. 1 performed; 2 defaulted and receivers were required to take over the assets and sell them down. The last money is scheduled to be returned in Jan 22. The under-performance vs. my core portfolio (60% global equity indices and the 40% in a small number of investment trusts / REITS) is eye watering. While the high fixed returns which are 'asset backed' seem attractive my main concern regarding these investments was that when they go wrong; they go really wrong - sadly this proved correct.

A 9, 18 month and two year loan turned into a 3 year loan for the one which performed and 5 year loans for the two which defaulted. The legal, receiver and other associated costs spiralled on the defaulted loans and then the cherry on top has been the realisation of the asset far below pre-loan independent valuation... que further law suits (and costs) now against the valuation firm. I feel somewhat foolish for not sticking with my gut, but the sum invested was relatively small - the frustration I have had over recent years after realised this is something I wanted nothing to do with has been the length of time to exit. We have had covid but the main delays have all been legal - I wrote the investments to zero and told the firm to stop contacting me outside of repayments and am very much looking forward to the final 15% capital repayment in Jan. I realistically could have fared a lot worse without the one performing loan which repaid with over a year of extremely high penalty interest ... I would avoid this asset class like the plague.

2 EIS & SEIS; the 30% and 50% tax relief respectively was invested in my primary portfolio of global equities which has done very well. The investments themselves were very high, high and medium/high risk. The very high SEIS was a fund of 10 investments in media and games - will be worth zero so I will lose 27.5% of investment after tax reliefs. The medium / high risk EIS was effectively all implementation risk - build a factory to produce something they had an offtake agreement for ... turns out Covid + staff shortages since Brexit and now the energy spike means they were never able to get near their revenue forecasts - they will likely soon go into receivership -38.5% return after reliefs. Lastly, my final company is show a 250% positive return if realised but paper profits are worth paper. My frustrations come from - exit plans appear to be a moving goal post - the performing company is now talking about a trade sale in 2027. I won't be doing any more EIS / SEIS because I simple don't enjoy the lack of control, high fees and my perception is the need for a venture capital style portfolio where one investment may pay for another 9 losers - too much work and effort for me as I haven't overly enjoyed the process.

VCTs - two have been really successful; one has been poor. Overall the investments are +45% total return including tax relief return and this does not account for the reclaimed tax been invested into my primary portfolio for the past 4-5 years and the tax free aspect of the dividends which is a really significant bonus for higher and additional rate tax payers. I invested in 3 major VCT providers and from next April I can start selling my holdings. Do I plan to continue holding and investing in VCTs - undecided but leaning towards no and selling my holdings. I personally feel these funds are a bit opaque and the fees are high. In addition there is a huge amount of cash pouring into VCTs since the change of pension relief in the middle of the last decade. I wonder if the past few years has been a great environment for venture capital with low interest rates and a huge amount of money flowing into the private equity and venture capital markets. Lastly, the rule changes (I believe in 2016) reducing some less risky qualifying investments in VCTs (like MBOs) has the effect of increasing VCTs risk over time - as the pre-2016 portfolio investments were realised and replaced with the new riskier qualifying investments. So for these reasons and the simplifying reason I mention below I lean towards closing the door on these investments.

Last comment - a few years ago I started the process of really simplifying my financial life - highly liquid and diversified equity portfolio with a couple of investment properties etc. The simpler I keep things seems to really boost my happiness and feeling towards my finances which is also something to be valued so my gut is all the above investments will be unwound orderly as soon as it makes sense.

*apologies for any English errors, this turned into a much longer note than I intended given my original question

[scotia]

Many thanks Walkei. A most interesting communication.

I have never invested in Finance Loans, and only had one EIS investment, which I exited with a loss.

However I have invested in VCTs since 2005, often selling at the end of the 5 year tax break period. I'm now in my late 70s, and have decided to run down my VCTs - the chief driver being a desire by my wife (an self) to simplify our tax affairs. So our last new VCT investments were in tax year 2019/2020 (with some DRIS tidied up later). In the early days the VCT prices (particularly AIM VCTs) were very volatile, and we thought of them as high risk, but potentially high reward capital. In fact most of them (eventually) turned out to be steady income sources, and over the 5 year period, they provided a reasonable total return, when the tax relief was considered. This was particularly true when enhanced buy backs were allowed. So looking at a Northern 3 which I held from 2005 to 2019 (with an enhanced buy-back in between), I had a 14% XIRR (annual total return) or 5% if the two tax returns are ignored.
The reduction of the initial tax return from 40% to 30%, the shut down of enhanced buy backs, and the later restrictions on allowable VCT investments have possibly made VCT investments less attractive - however the major managers seem to have coped, some better than others, and recent returns have been respectable in my list of VCT investments. E.G. looking at two VCTs from the Mobeus stable which I have held for just over 4 years, the current (Value + Dividends - Cost)/Cost is over 100% - where the Value is based on the current Bid Price, and the Cost is the original purchase price minus the initial tax return.

There are however, some possible clouds on the horizon. A number of the original (successful) management groups have handed over their VCTs to new organisations. E.G Baronsmead and Mobeus to Gresham House, and Northern to Mercia. Although the Investment teams are normally transferred in such situations, it is probably an un-settling change. And there seems to be very large new investments in VCTs - will all of these new funds find good homes at a fair price? So if I were younger, and still taking an active interest in VCTs, I think I would be a little more cautious than before.

[scrumpyjack]

I invested in these things modestly back in the late seventies/ early eighties. Can’t remember exactly when or what they were called in those days but they effectively got me tax relief at 75%. Eventually they realised a small return but only on a net of tax basis (ie as if they had cost 25% of the full cost!). I decided it really wasn’t worth the hassle and that the tax relief simply meant the promoters could extort higher fees etc, so I have never bothered with EIS, VCTs etc etc.

[Walkeia]

Thank you for the responses Scotia & ScrumpyJack. I agree with Scotia that on a total returns basis I can have no complaints about the performance of my VCTs - they are the one area I would certainly consider of the asset classes I tried if I wasn't deciding to prioritise other things.

[cprof]

Reference your question re loss relief. I am far from an expert but I did succesfully claim loss relief via last years self assessement, well insomuch that I haven't been told by HMRC that I broke the rules!!

I found the following documents of some help
1) HMRC help sheet HS286
2) Oxford capital document Just search "Oxford-Capital-Loss-Relief-Guide-2019." and the pdf should appear.

My EIS investment was in "The Deepbridge technology growth enterprise scheme", I deposited £15K and they selected 3 investments, one of which went into liquidation. I was informed by deepbridge that the board of the invetment company had decided to proceed with a Creditors Voluntary Liquidation and that following the completion of the liquidation process the investment would be of "negligible value" and I could claim loss relief. This was in Jan and by April on the 3 month portfolio valuation the value was zero so I made the claim via self assessement. I did not find a clear and simple explanation as to how to do that.

My thoughts on my overall experience with EIS/SEIS are similar to yours in that the performance so far has been OK but there have been hassles and niggles...
1) Claiming loss relief not easy to understand
2) With my SEIS investment the asset custodian went into liquidation which meant most of the cash I had invested was frozen and was left uninvested for well over a year and its coming up to 2 years and still 6% remains uninvested ( My investment was less than £85K so there was little/no risk of loss)
3) A valuation report got one share price wrong, inflated by 80%
4) Unbeknown to the investment manager, one of my five SEIS invesments had payments made to 3rd parties by a regional growth programme which according to HMRC constituted state aid and thus only 88% of my investment qualifed for income tax relief. ( I did not get the other 12% returned to me!!)
5) I have no problems with unpredictable timeframe and lack of cash flow.
I may have been unlucky but I think I will stick to VCT's unless I see strong reasons to return to EIS/SEIS

[Walkeia]

Thank you for the documents; really helpful cprof

[ukfire]

My very low roller experience of EIS and SEIS is through Seedrs and Crowdcube.

My SEIS Crowdcube investment (in a start-up brewery, maybe avoid these!) went bust. I got an email from the company announcing liquidation and then one two years later from Crowdcube confirming it had been wound up. I could have claimed my loss relief then I suppose. I didn't because the amount was too small to bother with.

Seedrs: I've generally stuck to EIS companies, because the SEIS offers are generally a punt on a person with an idea (with some exceptions). I've found the following tends to be true for most Seedrs offers:
- A tend towards overpricing, but most raises get filled regardless (even some really atrocious deals).
- Discussion in the company-specific forums is quite rude a lot of the time. So many companies disengage after raising funds.
- Businesses with proven management teams tend to do better than a person with an idea, e.g. knowing when to raise funds, knowing when to do xyz.
- Businesses that need a lot of capital aren't suited to crowdfunding.

I've found that my better investments tend to be:
- Decent and proven management teams (e.g. partner in big four, FTSE100 company senior manager, etc.)
- Investing alongside a VC/VCT firm and their valuation/due diligence, but they generally still get preferential terms (preferred stock etc.)
- Part of the Sustainable Accelerator cohort (8 mostly SEIS investments over a year with mentoring of the companies). I think they get better valuations, despite a higher carry (20% vs 7.5% normally).

I've had one almost total loss on Seedrs out of 24 investments. I've sold two on the secondary market (one at a profit). I expect one to float next year and it should pay for all the others by itself.

[UncleEbenezer]

My very low roller experience of EIS and SEIS is through Seedrs and Crowdcube.

MeToo (with the ill-fated exception of the Swansea Tidal barrage). I have a mix of outcomes (more writeoffs than you), though most of my crowdfunding investments could yet go either way. I'd strongly agree with you it's easy to overpay when one doesn't have as hard a nose for it as a VCT, but there are ways to mitigate that. Overall, my crowdfunding portfolio would look like a mediocre but not disastrous VCT.

I treat each such investment as a bit of a flutter: others may bet on the horses, I bet on the companies. That gives me the choice to support companies and managers I like, and the chance to watch them progress. When a bet is successful I have the satisfaction of slightly more direct involvement than with a VCT. At the same time, the lack of control is frustrating: Pod Point was successful up to a point (my five-year return x3, or x4 including EIS relief), but most of the crowd including me thought we were being forced to exit too early and would rather have held on another 20 months or so for the recent flotation.

Re:

- Discussion in the company-specific forums is quite rude a lot of the time. So many companies disengage after raising funds.

I would take issue with that. Where companies engage constructively, discussion can be very positive, even when a company is struggling. It can tend to go sour when an investee fails to engage with his/her investors. There's one big exception to that in my portfolio where the sheer volume of discussion might be a bit overwhelming, but that's one whose story is looking positive. OK, and another where it's huge and largely rude, but that comes from a company now written off and a management that behaved badly, and perhaps the bitterest is a former employee who went unpaid at the end.